It’s not true that there are no second chances in American life, as F. Scott Fitzgerald had it. Martha Stewart was given one of the most spectacular second chances in business history in 2005, after serving prison time for her illegal conduct in an insider-trading scandal.

Stewart’s firm, Martha Stewart Living Omnimedia Inc. (MSLO), which she controls with 96 per cent of the voting stock, unveiled new periodicals and television shows, and signed licensing deals for its housewares, furniture, paint, video games and other goods with Macy’s, Staples, PetSmart, Wal-Mart, Home Depot and Lowe’s. The new Martha Stewart lines included frozen dinners at Costco, a chardonnay for E & J Gallo, Stewart-branded weddings at Sandals Resorts, and Martha-designed subdivisions for KB Homes, one of America’s biggest homebuilders.

But seven years after the launch of one of the most determined comeback bids in recent business history, the effort has proved to be a bust.

A week ago Friday, MSLO reported a 17 per cent plunge in third-quarter sales and a quintupling of pre-tax losses. The company is folding its Everyday Food magazine into the flagship Martha Stewart Living, and will do the same with its Whole Living if it can’t find a buyer for that health and fitness journal. MSLO said it will lay off as many as 70 employees, or about 10 per cent of its workforce. That’s not a big number, as these things go. But then, for all its fame, MSLO is not that big a business.

Routinely described as a “billion-dollar empire” by a still-fawning celebrity press (hello there, InStyle), MSLO in fact has a market cap of just $188 million. Its 2011 total sales, down one-third from the 2007 peak, are a mere $221.4 million. That’s roughly one-quarter the sales of relative upstart Lululemon Athletica Inc., the Vancouver-based yoga-togs merchandiser. MSLO has lost money most years of its existence as a public company, its profits having peaked 13 years ago at a modest $25.6 million. Stewart’s firm has racked up staggering total losses of $185 million over the past eight years.

The time to sell MSLO stock was the day MSLO went public, in 1999, when the shares closed at $36.88 — its all-time high, making Stewart a billionaire on paper. But MSLO has since lost more than 91 per cent of its peak stock-market value, and now trades at less than $3.

Yet Stewart is among America’s most lavishly-paid business executives, in one of the more egregious examples of the Frank Stronach school of setting your own pay regardless of performance, which Stewart can do with her iron lock on MSLO voting shares. At Stewart’s direction, the composition of MSLO’s board has morphed from merchandizing experts like Arthur Martinez, former CEO of Sears, to a panel loaded with Martha friends, including Frédéric Fekkai, Stewart’s former hairdresser.

Thus, as MSLO has come to the point of circling the drain, Stewart has paid herself some $30 million in the past three years alone, including — draw a deep breath, corporate governance reformers — a $3 million “retention fee” for agreeing to remain employed at her own company. Shareholders also pay $30,000 a year for Stewart’s personal trainer, $73,230 for her “weekend driver,” and stipends of $179,317 and $230,769 last year to her sister-in-law and her daughter, Margaret Christiansen and Alexis Stewart, respectively. (This data is taken from MSLO’s own Securities and Exchange Commission filings.)

In fairness, the roaring late-1990s of MSLO’s zenith gave way to the “jobless recovery” of the 2000s capped by the Great Recession. And Stewart, a pioneer of lifestyle-based publishing and merchandising, attracted competition from Time Warner Inc.’s successful Real Simple, Winfrey’s O magazine and other lifestyle periodicals. MSLO does boast a huge library of how-to content that can be “repurposed” dozens of ways, fuelling speculation that Stewart will sell her firm before its value erodes further.

At 70, Stewart is still the “boss from hell” that predates her legal woes. In micromanaging the 3,000 MSLO items at Macy’s alone, and abruptly nixing tentative deals with new designers and licensing partners, Stewart has driven away a small army of talented employees. She has struggled to replace the gold mine that was the licensing deal she signed with the since-bankrupt Kmart in the 1990s, most recently botching a deal with J.C. Penney to replace the lost revenues.

Stewart, with her four homes, an alleged nine personal assistants (MSLO denies this), and coterie of celebrity pals, has disconnected from her audience. “There is an incredible divide between what Martha was interested in and what the reader wanted,” a former editor at Martha Stewart Living told the author of a New York magazine profile, which reported on how a series of MSL editors have been thwarted by Stewart in trying to put more emphasis on backyard barbecues and less on “tassel-strewn, Venetian-themed dinners for twenty.”

Lorenzo, manager of my local Staples, is chagrined at the Martha Stewart line of stationery in his store. “It doesn’t move,” he says. A Zellers veteran, Lorenzo recalls that her housewares didn’t sell briskly there, either. “We could hardly wait to get out of that contract,” he says. “I don’t think she ever recovered from the prison sentence.”

At her 2004 criminal trial, Stewart was found guilty of lying to U.S. government officials over the measly $45,673 loss she avoided in 2001 by dumping ImClone Systems stock on insider information. Stewart was later made to pay a total of $225,019 in fines, disgorgement of illicitly obtained gains, and settlement of SEC charges. The real financial loss for Stewart, though, was the nose-dive in MSLO stock, erasing hundreds of millions of dollars in Stewart’s net worth.

Entire companies built on a living brand are at high risk of calamity. The Chanel and Estée Lauder brands still thrive. But Revlon lost its industry dominance soon after the death of larger-than-life founder Charles Revson. Henry Ford’s chronic miscalculations and eventual nuttiness almost killed his namesake firm. Donald Trump’s near-lunatic Twitter rantings of late prompted U.S. anchorman Brian Williams to observe this week that the developer “has passed the last exit to relevance.” Even Oprah Winfrey, the first woman billionaire entrepreneur, has seen her fortunes slip since giving up the ubiquity that came with her daily TV-screen presence in millions of homes.

Contrition and locating the blame for blunders in the mirror are not Stewart strong points. On emerging from prison, Stewart told Fortune that the big lesson she took from her incarceration was that “I really cannot be destroyed.”

Whom the gods wish to destroy they first imbue with a sense of their immortality. Ask Caesar. Or Conrad Black.

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